Wise investors track Warren Buffett's portfolio. His holding company Berkshire Hathaway has one of the best long-term investment track records of all time. After reviewing his latest portfolio, two stocks look like screaming deals right now. But there's one particular stock I'd steer away from.
When it comes to investing, it's often advised to pick companies that control their own destiny. Of course, no single company completely controls its own destiny, but some businesses are more exposed to exogenous forces than others. One such company is Occidental Petroleum (NYSE: OXY), Berkshire Hathaway's sixth-largest holding. The firm owns around $12 billion in shares of the oil and gas producer.
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Don't get me wrong: Occidental Petroleum appears to be a well-run company. Buffett has expressed several times in the past that he has high confidence in the company's management team. But no matter how well the company runs itself, its success as an investment will likely hinge on the long-term direction of oil prices. If oil prices fall in the coming years, expect Occidental Petroleum to beat market indexes. And if oil prices rise, expect the company to do well.
Perhaps you have a well-researched, high-confidence expectation of where oil prices will head in the future. That seems to be the case for Buffett. But unless you're willing to bet both on a company's execution and the price direction of a volatile commodity like oil, stay away from stocks like this. The two companies below have much more predictability when it comes to their end markets.
Perhaps my two favorite stocks in Warren Buffett's portfolio right now are Visa (NYSE: V) and Nu Holdings (NYSE: NU). Both of these fintech stocks benefit from strong positive feedback loops. That is, the bigger they get, the stronger their business model becomes.
You're likely already familiar with Visa, one of the world's largest payment networks. Payment networks are huge beneficiaries of network effects. Merchants don't want the hassle of supporting necessary payment networks. Customers, meanwhile, only carry a certain number of payment options. The natural result is industry consolidation. There's a reason why Visa commands a 70% market share for credit and debit cards in the U.S.
Nu Holdings benefits from a similar feedback loop, although the effect is less direct. While most Americans haven't heard of the company, most Brazilians have. More than half of all Brazilian adults are customers of the company, which offers financial services like banking, credit cards, and insurance products directly through its smartphone app.
Nu only operates in three countries right now -- Brazil, Colombia, and Mexico -- but its growth runway should extend to all of Latin America and its 650 million residents. And like most technology businesses, Nu's platform benefits tremendously with scale. For instance, within a month of its launch, Nu's crypto trading platform exceeded 1 million initial users. This ability to rapidly push new products, plus the company's ability to ramp adoption quickly, results in profit margins that most banks can only dream of.
NU Profit Margin (Quarterly) data by YCharts
Nu only recently achieved profitability, but I expect its profit margins to continue to rise over the coming years as it leverages its ability to scale its customer base using an asset-light business model. As a more mature business, Visa already generates enviable profit margins. But both companies continue to grow volumes and revenues by double-digits, meaning their scale advantages will continue to compound.
Both stocks trade at just 33 times earnings -- only a tiny premium to major market indexes like the S&P 500. If I'm betting on two Warren Buffett stocks for the long term, Visa and Nu top my list.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.